NEW YORK ( TheStreet) -- Fraud scandals have waylaid many Chinese small-cap stocks this year, centering on those that came public through the controversial reverse-merger method. Securities regulators are investigating, and Congress has taken an interest as well. Throughout 2011, TheStreet will track major market-moving events among Chinese small-cap stocks. Click onward to view the year's biggest headlines in this sector so far this year. (Articles are reflective of the news at the time they were published.)

A controversial short-seller who has made a career out of accusing Chinese companies of fraud was the victim of a hoax.

According to a document that rippled across the Internet on Tuesday, June 21, the Securities and Exchange Commission filed a civil suit against Carson Block, the short-seller who composes critical reports on Chinese companies under the name Muddy Waters, alleging stock manipulation.

The document, however, was a fake. SEC spokesman John Nester confirmed as much. "We've issued no such release," he said. He declined to comment further.

Phony SEC press releases and other documents are nothing new, especially in the Internet age. The commission has in the past pursued enforcement actions against individuals who have created and released them.

A vibrant social-media network dedicated to Chinese stocks has developed over the last few years. The fake SEC complaint was posted and reposted by dozens of Twitter users. It also found its way to several market-focused blogs and Web sites.

The complaint was a fairly obvious fabrication. Marred by grammatical errors, it carried the litigation release number "21053." The true SEC document referred to by that number is the announcement of a permanent injunction against a person named Victor Ragucci in April 2010.

Block, who, by his own admission, takes short positions in the stocks he publicly accuses, has certainly made enemies. His scathing research reports have predated the implosions of Rino International and China MedieExpress. A third report, on Duoyuan Global ( DGW), came days before the New York Stock Exchange halted trading in the stock.

A fourth, which accused the Toronto-listed Sino-Forest of brazen fraud, has sparked concern among investors that accounting problems exist at Chinese companies beyond the small-cap names that entered the public markets through obscure avenues, such as reverse mergers. The Sino-Forest controversy, which has drawn in even world-class investors such as hedge-fund manager John Paulson, has has helped cause the China stock-fraud phenomenon to make the front pages of the world's major newspapers, along with the high-profile troubles of Longtop Financial ( LFT), an NYSE-listed stock that went public through an IPO. (Paulson has reportedly unloaded his position in Sino-Forest.)

Orient Paper has denied Block's allegations and has avoided the utter disasters that have afflicted his other targets; its stock recently traded at $3.19. (Block stands by his research on the paper company.)

The SEC hoax drew such immediate interest from followers of China stocks because it seemed as though U.S. securities regulators had turned their attentions away from the companies accused of fraud -- and toward their accusers.

The fake complaint against Block attempted to use familiar SEC legal lingo to paint a picture of short-seller fraud and stock manipulation -- one in which short-sellers concoct evidence of fraud against companies out of thin air and then sell those reports to hedge funds ahead of making the allegations public on the Internet.

Harbin shares did indeed soar once the regular session began. By the close of trading on June 20, Harbin shares stood at $13.35, up almost 60% on the day.

But that's a far cry from the announced buyout price of $24 a share.

One trader who specializes in merger arbitrage, Thomas Kirchner, of the Quaker Funds, told TheStreet that his fund had sold out of its position in Harbin at the end of May. "There are quite a few red flags in this deal, and we continue to be pessimistic about it," he said.

In a press release, Harbin said its board of directors signed a definitive agreement to sell the company to its founder and CEO, Tianfu Yang, along with a Hong Kong-based fund called Abax, which has been involved as an investor and counterparty in several deals with U.S.-listed Chinese companies.

According to Harbin, much of the funding for its LBO, a term loan for about $400 million, will come from China Development Bank, a massive state-controlled institution that last year made a $50 million personal loan to Yang, who pledged his own Harbin shares, 7 million of them, as collateral.

Harbin's U.S.-based spokesman didn't respond to a request for comment.

The events of the last few weeks have quickly made Harbin the subject of one of the noisiest long-short battles in the Chinese small-cap space, which has been rife with controversies for almost a year. A manufacturer of micro motors based in the city of Harbin, in northern China, Harbin came public in a reverse merger in 2005. It is one of dozens of small Chinese companies that have come under extreme scrutiny after an outbreak of fraud allegations and revelations, which have eroded investor confidence in the group at large and triggered an investigation by the SEC.

Harbin itself has not escaped allegations that it has engaged in fraud. Short-sellers have been swarming around the stock since last year. One of those short- sellers is Andrew Left, who runs the Citron Research blog, where he publishes reports on companies he has taken a short position in. In recent weeks, Left has led the charge against Harbin, calling the company's buyout plans "a sham" and urging the SEC to "halt this security." Left posted his latest missive on Thursday and appeared to help push Harbin's stock down 51% that day.

In its press release on Monday, Harbin CEO and founder Tianfu Yang came out fighting. His words appeared to refer to Left. "A significant amount of information that is false and misleading as well as defamatory has been introduced into the market, and has clearly affected market trading of the Company's stock," Yang said in the press release. "The Company is prepared to take all necessary legal action against those who have made such statements." Yang's threat of legal action follows a recent trend of Chinese companies promising to sue their critics for libel and stock manipulation.

Contacted by TheStreet, Left said he stands by his position that Harbin's LBO is a fake.

But, he added, "My thoughts are irrelevant compared with what Wall Street says; the Street votes with its dollars. Unless the stock gaps to 19 or 20, then what are we arguing about here? I would venture to say, if they are able to pull this off, in the history of M&A there's never been a stock that's traded so far below the takeover value when a deal has gone through."

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Two more Chinese small-cap companies saw their shares halted the week of June 12 as the scandal surrounding stocks hailing from the People's Republic showed no signs of abating.

First, it was China-Biotics ( CHBT) on Wednesday, June 15. Then, on Friday, Nasdaq suspended shares of Yuhe International ( YUII), a "leading supplier of day-old chickens raised for meat production."

Fourteen Chinese stocks listed on major U.S. exchanges are now halted. Some of the suspensions have lasted nearly three months as exchange officials sort through allegations of accounting chicanery, mostly lodged by audit firms that abruptly resign.

The odds of maintaining a listing in the wake of a halt appear increasingly poor. Of the halts since the beginning of the year, exchanges have booted nine companies' equities to the over-the-counter markets, where values are typically and predictably decimated.

The Yuhe suspension came after the company held what one analyst called an "astonishing conference call" on June 17 to address allegations made by a short- seller group a day earlier. The group, called Geoinvesting, said it had unearthed evidence that Yuhe had misled investors about an acquisition of 13 chicken farms said to have occurred in 2009.

On the conference call, company executives denied that accusation, but admitted that they had failed to disclose that the acquisition hadn't gone through. As part of the purchase agreement, Yuhe has said that it made a down payment of 80% of the purchase price, or $12 million. But when the seller decided to spike the deal, Yuhe's chairman and CEO, Zhentao Gao, decided to put the $12 million into a private bank account, the company's CFO and COO said during the conference call Friday. The executives also said that, in place of this failed deal, Yuhe had gone ahead and purchased 11 different farms from a separate seller, using that $12 million sum.

"During this entire time, Yuhe continued to claim that business was usual and that the acquisition from Dajiang did go forward," said Rodman & Renshaw ( RODM - Get Report) analyst Lewis Fan in a note on June 17. Fan wrote that Yuhe's failure to disclose this information was "perhaps a face-saving measure."

"We are dumbfounded by the events that have taken place," Fan continued in the note. "If true, what the company, and more specifically, the company CEO, has done, could be serious violations of securities regulations."

Rodman, which also suspended its coverage of Yuhe, is normally a China stock bull by dint of its role as underwriter of scores of Chinese securities, including a $25 million follow-on offering of Yuhe shares in October 2010.

The halt in Yuhe shares comes two days after China-Biotics, long a target of short-sellers, failed to file its 10-K annual report with the Securities and Exchange Commission after its auditor refused to sign off on the numbers. Nasdaq halted trading in the stock on June 15 after the close.

The reasons for the auditor's refusal were vague but nonetheless of a piece with an unfolding pattern. China-Biotics' audit firm, BDO Limited of Hong Kong, told the company in a June 10 letter that it had "identified certain serious issues as part of its ongoing audit work," according to China-Biotics in its June 15 disclosure filing.

Other Chinese companies facing trading halts this year have seen their auditors allege that executives colluded with their banks to forge bank documents in a bid to fool auditors about the size and health of those businesses. Those types of allegations, which would seem to support the suspicions of short-sellers who say they've been unearthing fraud at U.S.-listed Chinese companies for more than a year, have erased investor confidence in the sector.

China-Biotics, which has denied charges of wrongdoing made both by short-sellers as well as reports in the Chinese business media, said its audit committee is "investigating the issues" raised by BDO this time around and is "working to take all of the actions and to provide the requested information to BDO as promptly as reasonably practicable."

The Securities and Exchange Commission put out an investor bulletin on June 9 warning the world of potential fraud among companies that came public in the U.S. through a controversial method called a reverse merger.

Though the agency didn't single out companies hailing from China, a burgeoning fraud scandal among a raft of Chinese small-cap stocks that entered the market through the reverse merger process gave the SEC's bulletin a clear context.

For nearly a year, short-seller reports and media exposés alleging accounting fraud (as well as outright theft of capital raised from U.S. investors) have served to make toxic the entire Chinese small-cap stock sector. The trend has accelerated since March, as a series of companies have seen their auditors abruptly resign, refusing to sign off on the 2010 financial numbers that stock issuers must file with the SEC in their 10-K annual reports. Trading in the shares of more than 15 Chinese companies have been halted or delisted. Many stocks in the sector generally have lost more than half their value year-to-date -- tens of billions in evaporated market cap.

As reported by TheStreet in December, the agency launched an investigation last year into small Chinese companies that have gained listings in the U.S., mostly through reverse mergers, an entirely legal process by which a privately held business obtains a stock registration by combining with a shell company that does have such a registration.

The process is criticized as being a way to skirt the more rigorous scrutiny that regulators give bigger issuers looking to raise capital through initial public offerings. In 2009, there was a spike in the number of tiny Chinese companies doing reverse mergers and then "uplisting" their shares to major exchanges, often with the same stock promoters, investment banks, auditors and securities lawyers involved.

The SEC has set up a task force to look at Chinese small-caps, focusing not only on individual companies but also on those "gatekeepers" that help entrepreneurs in China raise capital on this side of the Pacific, according to people familiar with the probe.

In a press release announcing the bulletin on Thursday, the SEC's director of investor education and advocacy, Lori J. Schock, said, "Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies."

For some market observers, the warning brought the phrase "day late and a dollar short" to mind.

"What's next? Are they going to warn us that smoking is bad for you?" said one researcher and financial analyst who specializes in studying Chinese reverse mergers. "I mean, it's typical: The SEC coming in to tag bodies after the massacre."

Of the bulletin, he added: "This does no one any good now. And given that retail investors have the most exposure, it just goes to show that the agency is not doing enough to protect those investors who need the most protection."

SEC spokesman John Nester declined to comment on those critiques.

Short-sellers, who bet on an asset's decline in value, have been warning the SEC since at least 2009 about the propensity for fraud among Chinese small-caps, according to people with knowledge of the matter.

The issue started to gain traction in Washington last summer and fall. In July 2010, the regulatory body that oversees U.S. accounting firms -- the Public Company Accounting Oversight Board -- issued its own warning to auditors, instructing them to be more diligent in analyzing the financials of Chinese companies. In September, the House Financial Services Committee sent a letter to the SEC and the PCAOB that communicated broad concern about the degree of scrutiny that regulators were giving to Chinese stock issuers. The committee, headed by Spencer Bachus, has hinted at a desire to hold hearings on the matter, but nothing has yet been scheduled.

This year, in an April speech, SEC Commissioner Luis Aguilar effectively confirmed the existence of a broad investigation into alleged fraud among Chinese reverse mergers. Later in the same month, the SEC's chairman, Mary Schapiro, wrote in a letter to Congress that her agency "has moved aggressively to protect investors from the risks that may be posed by certain foreign-based companies listed on U.S. exchanges." She cited a "proactive risk-based inquiry into U.S. audit firms" with a significant number of foreign clients, "including in the PRC."

Lately, fear of fraud has spread even to bigger Chinese companies that came public in the U.S. through IPOs. Longtop Financial ( LFT), for example, saw its auditor resign and allege a series of illicit acts by the company's management, going so far as to insinuate that the executives were colluding with their local banks in order to inflate financial numbers. Similar charges were levied by the auditors of ChinaMedia Express ( CCME), whose stock was demoted to the Pink Sheets last month. The SEC is investigating both companies.

In its bulletin on reverse mergers Thursday, the agency noted the recent enforcement actions it has taken against a handful of companies, most of which were micro-cap or "penny" stocks trading on the over-the-counter markets. Most reverse mergers begin life on the over-the-counter markets. The SEC has suspended trading in shares of six companies and revoked the registrations of several others.

The most dangerous potential frauds, experts say, are the companies that have graduated from penny-stock status to the major exchanges. As such, the Nasdaq Stock Market in April applied to the SEC in order to institute rules that would make it more difficult for reverse-merger companies to list on its exchanges.

The application document released by Nasdaq noted that it had unearthed cases of apparent manipulation in the stocks of reverse-merger companies that had applied to the exchange for a listing. In these instances, according to Nasdaq, "it appeared that promoters and others intended to manipulate prices higher to satisfy Nasdaq's initial listing bid price requirement." In other cases, companies have "gifted stock to artificially satisfy the 300 round lot public holder requirement."

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The Chinese reverse-merger company Yongye International ( YONG) announced on May 31 that it got a boost from some big Wall Street money, receiving a $50 million investment from Morgan Stanley's ( MS) Asian private-equity unit.

The move comes as a surprise. In recent months, institutional investors have increasingly forsaken Chinese small-cap stocks amid an expanding fraud scandal. At least 18 Chinese stocks are under trading halts or have been de-listed. The Securities and Exchange Commission has been investigating the space since last year.

Recent problems at Longtop Financial ( LFT), a Chinese company taken public through a straightforward IPO by Goldman Sachs ( GS), have increased worries among investors that financial accounting in the People's Republic isn't what it seems, and that overstated profits might be widespread. As with other Chinese companies this year, Longtop's Big Four auditor resigned, indicating that the company's management appeared to have forged bank documents and actively thwarted auditors' efforts to investigate.

Yongye -- which, like several other U.S.-listed Chinese small caps, produces organic fertilizers -- hasn't escaped negative attention. Several reports circulated on the Internet and written by investors with short positions in Yongye stock have raised questions about the company's financial reporting.

Yongye has denied the charges. But its stock, along with Chinese small-caps in general, have nonetheless taken a pounding. It has plunged more than 56% from above $8.50 in early January to $3.75 as of the close of trading Friday.

Morgan Stanley's interest in Yongye is, if nothing else, contrarian. "After extensive due diligence, we believe Yongye to be an exceptional company," said Homer Sun, a managing director of Morgan Stanley Private Equity Asia, in a press release announcing the deal.

Yongye said the deal contains a sweetener. If the company hits certain "multi-year profit commitments," Morgan Stanley will be able to convert convertible stock at $15 a share. The company didn't name the specific earnings targets or the amount of convertible stock that will be issued to Morgan Stanley.

Trading in Yongye stock was halted breifly Monday morning, joining more than a dozen other Chinese stocks under trading suspensions. There was a big difference, however. Yongye had favorable news to report. The other companies are under scrutiny because of fraud allegations.

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When Tao Li, the chairman and founder of tiny Kingtone Wirelessinfo ( KONE), rang the opening bell for the Nasdaq Stock Market on Monday, it should have amounted to an awkward moment for the equities exchange.

That's because Li, who hails from the city of Xi'an in central China, is also the chairman and founder of China Green Agriculture ( CGA - Get Report), a controversial reverse-merger company, and one of the first to draw the suspicions -- more than a year ago -- of short sellers and private investigators, who say they've unearthed evidence that the company may have committed fraud.

China Green, whose stock is listed on the New York Stock Exchange, not Nasdaq, has disputed the allegations made against it. But the Securities and Exchange Commission has nevertheless seen fit to launch an inquiry into the company. Since September, the agency's regulators have been conducting an "informal inquiry" into China Green, which completed its reverse merger in 2007. (The exact nature of the inquiry hasn't been disclosed; the SEC has declined to comment and China Green has only said that it's cooperating with the agency.)

The China Green probe is, however, part of a much broader investigation by the SEC into the possibility of widespread accounting and stock fraud at a raft of small Chinese companies that have sold equity in the U.S. over the last five years or so, according to people with knowledge of the investigation.

The regulatory heat on reverse merger companies from China in particular has been so intense this year that Nasdaq has just recently moved to make it harder for reverse-merger stocks to gain listings on its exchange -- a development first reported by TheStreet last month.

And yet Nasdaq has chosen to invite Tao Li to its podium in Times Square. An exchange spokesman declined to comment on the matter, except to say, in a prepared statement, "Market open and close ceremonies are visibility opportunities for our listed companies and other organizations including non-profits as well as for individuals such as entertainers, athletes and politicians."

Both Nasdaq and the NYSE Amex have come in for some sharp criticism for their dealings with Chinese small caps, especially those that have emerged onto U.S. markets through reverse mergers, sometimes called reverse takeovers, or RTOs. Critics say the exchanges have missed (or, worse, ignored) the dubious nature of many Chinese companies -- refraining from performing suitable due diligence -- just to expand their listings business and increase revenue.

True, Kingtone isn't a reverse merger. It arrived in the U.S. through an initial public offering in May 2010. (Li's bell-ringing on Monday is meant to celebrate the one-year anniversary of Kingtone's Nasdaq debut.)

But the links between China Green and Kingtone run deep. The two companies have shared the same office building in Xi'an for the last decade. A Kingtone subsidiary owns the property and serves as CGA's landlord. Kingtone's 36-year-old CFO, Ying Yang, served as China Green's CFO for 19 months starting in September 2008. (She made the switch right before the Kingtone IPO last year and will stand next to Li at the Nasdaq opening-bell ceremony.)

One of Kingtone's underwriters, the California investment bank Roth Capital, has served as a China Green underwriter.

China Green is also a Kingtone customer. Although it bills itself as a "China-based developer and provider of mobile enterprise solutions," Kingtone manufactured and installed "fertilizer processing equipment" for China Green in 2009, according to SEC filings made by the two companies. Those documents show that Kingtone received more than $1.3 million for those service. Kingtone, which reported revenue of $14.5 million in 2010, also received about $450,000 for outfitting China Green's "smart greenhouses" with sensors and other wireless monitoring gadgetry, according to the filings.

Like many Chinese entrepreneurs who have tapped U.S. equities markets, Li has built a sprawling, complex enterprise in China over the last 15 years or so. He controls a diverse array of businesses and companies and has carved out certain of them to spin off in the U.S., selling stock on this side of the Pacific and taking the money back to the mainland.

As it turns out, it's been an inauspicious 12 months for Li's Kingtone Wireless. The stock priced at $4 in its May 2010 debut -- netting $16 million for the company -- but has deflated since spiking above $5 in December. It traded recently at $1.88. The stock never gained much traction with institutional investors. As of Dec. 31, a paltry 3.66% of the company's common stock was held by a total of six institutions, according to data compiled by Edgar Online.

China Green, on the other hand, has been waging a war of words since the middle of 2010 with short sellers and the research firms they hire to investigate companies they're interested in betting against. China Green came public in the U.S. through a reverse merger in 2007 and has seen its stock trade as high as $18. It reached that point in December 2009, not long after it switched to the NYSE from the Amex, to which it was uplisted eight months earlier from the over-the-counter bulletin board.

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The Nasdaq Stock Market wants to make it harder for companies that have come public through reverse mergers to gain listings on its exchange.

On April 18, Nasdaq submitted a proposed rule change to the Securities and Exchange Commission that would heighten the exchange's listing requirements for such companies, which use a so-called "back-door process" to come public. The procedure, critics say, circumvents the stricter scrutiny that financial-markets regulators give to initial public offerings.

According to Nasdaq's proposed rules, a reverse-merger company's stock must trade on one of the over-the-counter markets (or another exchange) for at least six months after filing its first audited financial statements to regulators.

The exchange called it a "seasoning" period. Also, the company's stock should maintain a bid price of more than $4 for at least 30 of the first 60 trading days after applying for a listing on a major exchange.

Nasdaq is required to obtain SEC approval before it can make the change to its listing requirements, according to a Nasdaq spokesman.

Triggering the Nasdaq proposal has been a rash of fraud revelations among Chinese companies that have sought to raise capital on U.S. equities markets by first obtaining stock listings here through the reverse merger process, also known as a reverse takeover, or RTO. Many other Chinese companies have been accused of fraud, particularly by short-sellers. As detailed by the TheStreet in December, the SEC has launched a wide-ranging investigation into the Chinese reverse-merger phenomenon.

A flood of trading halts and delistings also have hit Chinese small-cap names over the last two months, and more and more companies face auditor resignations, allegations of accounting irregularity and delays in filing their annual reports with the SEC. The stocks of 15 Chinese small-cap companies listed on major exchanges are currently halted. Some have not traded in more than month, including China MediaExpress ( CCME), China Agritech ( CAGC) and ShengdaTech ( SDTH). Just on April 21, Nasdaq halted trading in the shares of China Integrated Energy ( CBEH), a biodiesel producer accused of massive fraud.

The Nasdaq's proposed rule change does not single out Chinese companies, but rather reverse mergers in general.

The major exchanges -- including Nasdaq as well as the NYSE and its Amex division -- had come under fire from some in the investment community for allowing reverse-merger companies to "uplist" their shares with little due diligence on the part of exchange authorities. Defenders of the reverse-merger process say it's an efficient and cost-effective way to bring small companies public.

A Nasdaq official who spoke on condition of anonymity said that, over the last year or so, "a fair number" of reverse-merger companies seeking a listing on Nasdaq have withdrawn their applications after exchange officials raised questions.

The official also said that the exchange has been using an investigative firm to examine the businesses of both applicant companies as well as those with shares already listed on Nasdaq. The official declined to be more specific.

"In recent months there has been an extraordinary level of public attention to listed companies that went public via a reverse merger," Nasdaq said in its proposal to the SEC. "The financial press, short sellers and others have raised allegations of widespread fraudulent behavior by these companies, leading to concerns that their financial statements cannot be relied upon."

The exchange also said that it has become aware of instances of apparent manipulation in the stocks of reverse-merger companies. In these instances, Nasdaq said, "it appeared that promoters and others intended to manipulate prices higher to satisfy Nasdaq's initial listing bid price requirement and where companies have, for example, gifted stock to artificially satisfy the 300 round lot public holder requirement."

Nasdaq made other pointed references to the stock promoters who help find and shepherd private companies through the reverse-merger proces. "Concerns have also been raised that certain individuals who aggressively promote thesetransactions have significant regulatory histories or have engaged in transactions that are disproportionately beneficial to them at the expense of public shareholders," the exchange said in its proposal to the SEC.

Over the last year, Nasdaq said its staff has adopted stricter rules for reverse-merger companies applying to list on the exchange. "However, Nasdaq also believes that additional requirements for listing reverse merger companies are appropriate to discourage inappropriate behavior on the part of companies, promoters and others. Accordingly, Nasdaq proposes to adopt certain 'seasoning' requirements for reverse mergers."

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Universal Travel ( UTA), whose shares have been halted since April 12, became the latest Chinese small-cap company to announce that its auditor had resigned after the firm raised accounting red flags.

The auditor, Windes & McClaughry, of Long Beach, Calif., ran across the alleged problems while auditing Universal Travel's 2010 financial results in preparation for filing its 10-K annual report with the Securities and Exchange Commission, the company said in a disclosure to the SEC late on April 14.

Universal Travel had already divulged, back on March 31, that it wouldn't be able to file its 10-K on time.

Windes couldn't immediately be reached for comment. A Universal Travel spokesperson, at the investor relations firm Christensen, didn't respond to a request for comment.

The problems Windes allegedly found were described vaguely by Universal Travel in its 8-K disclosure filing. For example, Windes told the company before it resigned that it had run into "issues related to the authenticity of confirmations" as well as "lack of evidence of certain tour package contracts and related cash payments," according to the 8-K.

Windes also suffered a "loss of confidence in confirmation procedures carried out under circumstances which Windes believed to be suspicious," the 8-K said.

Windes decided to quit when "it was no longer able to complete the audit process," according to the 8-K. "Windes stated this was due in part to Management and/or the Audit Committee being non-responsive, unwilling or reluctant to proceed in good faith and imposing scope limitations on Windes' audit procedures."

In the filing, Universal Travel disputed Windes' claim that it had blocked the firm's ability to conduct the audit. "We believe that we have acted responsively, prudently and in good faith to address the numerous issues raised by Windes during the entire audit process," the company said.

April 11-12: Trading Halts Continue

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On April 12, Universal Travel ( UTA), an online travel booking service, became the latest Chinese small-cap company to have trading in its shares halted by a major U.S. exchange.

Of the 15 stocks halted on the New York Stock Exchange, the Amex or the Nasdaq as of April 11, 12 were Chinese companies.

Universal Travel has long been criticized by short sellers, especially the Australian hedge fund manager John Hempton, who often writes on his blog about the stocks he's selling short. Last September, he wrote an item questioning the company's bona fides.

Universal Travel announced on March 31 that it would need to delay the filing of its 10-K annual report with the Securities and Exchange Commission.

Universal Travel followed Puda Coal ( PUDA), whose stock was halted by the Amex on April 11. Another short seller, a Canadian investor living in Shanghai named Alfred Little, had taken to releasing highly critical reports on the Internet about stocks he has sold short. In a missive at the time, Little claimed he found evidence that Puda's founder sold half the company out from under U.S. investors.

In early April, a high-ranking securities regulator made the most extensive public statements yet about allegations of rampant fraud among hundreds of small Chinese companies that have raised capital in the U.S. in recent years through a "backdoor" process called a reverse merger.

In a speech in Washington on April 4, SEC Commissioner Luis Aguilar warned, however, that it would likely prove difficult for investors to recoup damages even in cases of clear-cut wrongdoing.

"Even though these companies are registered here in the U.S., there are limitations on the ability to enforce the securities laws, and for investors to recover their losses when disclosures are found to be untrue, or even fraudulent," Aguilar said.

"While the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud," he said, adding that the SEC has been "working collaboratively and tirelessly with many others to investigate and shed light on this situation."

As TheStreet reported in December, the SEC has launched a broad investigation into the Chinese reverse-merger phenomenon, examining allegations of fraud directed at a slew of specific companies. Regulators are also focusing on the so-called "gatekeepers," the investment bankers, promoters, auditors and law firms that profit by helping small Chinese companies raise capital in the U.S.

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On March 29, the New York Stock Exchange decided to delist the shares of Duoyuan Printing ( DYP), a Chinese reverse-merger company under investigation by the Securities and Exchange Commission for fraud.

Duoyuan appealed that decision with the NYSE's board of directors of regulation but, in the end, was unsuccessful in its efforts to maintain its Big Board listing. The stock went to the Pink Sheets, under the symbol DYNP, on April 4. Its price has since fallen below a dollar.

Duoyuan, a small manufacturer of printing equipment, had failed to file a financial report with the SEC since May 2010. The company fired its auditor, Deloitte, in September, after the firm raised red flags about the company's accounting. The move appeared to prompt a formal SEC formal investigation into alleged fraud at the company, a probe that started last October but that Duoyuan disclosed only on March 18.

Duoyuan had until April 13 to file the delinquent reports, according to NYSE rules. Under normal circumstances, Duoyuan would have had the possibility of filing for an extension. But because the company still hadn't hired an auditor, and because of the "various disclosures" made by Duoyuan on March 18 -- including, presumably, the SEC probe -- the NYSE decided that the company's common stock was "no longer suitable for continued listing on the NYSE and that any additional trading period is not appropriate," the exchange said in a press release.

In its own press release, the company included remarks from Everett Chui, its "Audit Committee Financial Expert." He said the company's own internal investigation into the red flags raised by Deloitte had "made substantial progress. We anticipate its completion at the end of April 2011, at which point we plan to engage an auditor to allow us to complete our SEC filings and fulfill the listing standards of the NYSE." Chui, a Hong Kong accountant, was hired by Duoyuan to oversee the internal investigation.

"We truly appreciate the continuing patience of our investors and look forward to bringing the market further updates in a timely manner," Chui added.

More details emerged in the China MediaExpress ( CCME) brouhaha late on March 17 when the company filed its form 8-K with the Securities and Exchange Commission, detailing the resignations of its auditor and CFO on March 14.

Beset by fraud allegations since January, China Media said in the filing that one of its key directors, Dorothy Dong, had also resigned.

Dong is a managing director and head of China investments at C.V. Starr Investment Advisors, the fund belonging to Maurice "Hank" Greenberg, which had acquired a large stake in China Media and was its biggest backer. Small investors who had bought China Media shares looked to Starr's 8.8% stake -- which must have resulted from stringent due diligence, the thinking went -- as a validation that the company was a legitimate and fast-growing enterprise.

A spokesman for Starr declined to comment. The firm later filed suit against China MediaExpress and some of its top managers in Delaware court, alleging that they had defrauded Starr.

Trading in China Media stock has been halted since March 11.

The company's former auditor, the Hong Kong affiliate of Deloitte, said in its resignation letter that it had "lost confidence in the representations of management (which underpin any audit)." The quote came from Dong's resignation letter, in which she cited Deloitte's correspondence. Letters from both Dong and the outgoing CFO, Jacky Lam, were appended to China Media's 8-K filing. China Media didn't include the letter from Deloitte, choosing only to summarize its content in the 8-K filing itself.

According to China Media in the 8-K, "There were no disagreements between Ms. Dong and the Company that resulted in her resignation."

Except one thing: "Ms. Dong's resignation letter indicated that she disagreed with the conduct of the Company's management resulting in Deloitte's resignation and the resistance of the management to some protective measures that she and other independent directors proposed at a board meeting held on March 13."

The dispute between Deloitte and company management arose during the audit process for China Media's 2010 financial results. The firm first raised red flags with company management in a letter dated March 3. A little more than a week later, on March 11, Deloitte resigned. Nasdaq halted trading in CCME shares that day.

Later, on March 18, China Media lost its most vocal public champion when a research analyst who had long defended the company against fraud allegations left her position at Global Hunter Securities.

A spokesman for Global Hunter wouldn't say whether the analyst, Ping Luo, had resigned or been fired. Luo couldn't at the time be reached for comment.

Global Hunter, meanwhile, is one of a number of investment banks who do a steady business in underwriting shares of Chinese small-cap companies.

According to its web site, it has underwritten shares of two other companies with shares that are halted: Shengdatech ( SDTH) and China Agritech ( CAGC).

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A day after China MediaExpress revealed that its former auditor had resigned, saying it believed the company was worthy of an investigation into possibly dubious accounting practices, a handful of small-cap Chinese stocks sold off sharply.

Fraud allegations had buffeted share prices among these names for a year, as more of the investing public begins to doubt the integrity -- rightly or wrongly -- of financial statements emanating from the People's Republic.

More than a few of those stocks, most of which came public in the U.S. through a controversial process called a reverse merger, declined by more than 6% on heavy volumes during the trading session on March 15, a day after the China Media news broke. Many have been in the public eye before, accused of financial chicanery of one sort or another by short sellers.

Shares of China Sky One Medical ( CSKI), for example, a controversial maker of traditional Chinese homeopathic medicines, fell by as much as 21% before ending the session at $4.50, down 8%.

American Oriental Bioengineering ( AOB), a competitor of China Sky's, issued poorly received first-quarter results Monday, earning a downgrade from Brean Murray, which was an accomplishment, since Brean Murray is one of a few small U.S. investment banks that do a robust business in the raising of capital and selling of shares in Chinese small-cap companies. The firm, in other words, has an interest in being bullish on Chinese stocks. AOB's beaten-down stock finished the March 15 session by surrendering 18%.

Elsewhere, Telestone Technologies ( TSTC), a network equipment maker which was aided in its reverse merger by a longtime promoter of Chinese stocks named S. Paul Kelley, lost 9% on March 15.

Similarly, the small-cap beer brewer China New Borun ( BORN), which went public through the front door in an initial public offering, dropped more than 18% before recovering later in the March 15 session. The stock closed at $10.22, down 4.5%. China Education Alliance ( CEU), another beaten-down name, waylaid by accusations of skullduggery, ended the session by sinking 14% on more than double the daily average trading volume.

The declines came as the Chinese small-cap universe entered its conference season. A week before the China MediaExpress news broke, Rodman & Renshaw ( RODM - Get Report), one of the U.S.-based investment banks that does a steady business in underwriting the secondary offerings of small Chinese firms, hosted an annual investor conference in Shanghai, where company managements gave their spiels to hundreds of investors.

Then, on the week of March 14, Roth Capital hosted its annual small-cap confab near its home base in Orange County, California. About a third of the companies that gave presentations at the conference hail from China. They included a few of the more divisive names in the sector: China Green Agriculture ( CGA - Get Report), China Valves ( CVVT), China-Biotics ( CHBT)), Telestone, Orient Paper and Wonder Auto Technology ( WATG). (To be sure, many other Chinese companies untouched by specific criticisms or short-seller attacks also presented at the conference.)

Participants at the Roth symposium said the China Media news on March 14 rattled nerves and sparked a lot of chatter. By the following day, though, the scene had calmed as the meat of the conference got underway. As usual, Roth hired a well-known rocker to play at one if its evening parties. On Monday night, it was the aging 1980s star Joan Jett.

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Fourth-quarter numbers as reported by the company showed profit growth of nearly 70% year-over-year and revenue expansion of 15.7%. That translated to $5.3 million, or 29 cents a share, on the bottom line for the period ended December 31, and $36.3 million on the top.

Orient Paper was a battleground stock for much of last year, after a controversial short-side research shop, Muddy Waters, accused the company of out-and-out fraud and theft.

But Orient Paper appeared to win the contest over its doubters when, last fall, the audit committee of its board determined, with the help of $200,000 worth of consulting from Deloitte Financial Advisory Services, that its accounting was clean. (Orient Paper's auditor is the Hong Kong affiliate of BDO Ltd., not Deloitte.)

Orient Paper's equity was mostly in the hands of retail investors at the time of its fourth-quarter earnings announcement. Institutions held only about 15% of the company's float, according to Computershare, a stock transfer agent and data provider.

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Shares of China Security and Surveillance ( CSR) soared by as much as 25% on March 8 after its founder and CEO reiterated his desire to take the company private, this time naming a price of $6.50 a share.

In a letter sent to the company's board, Chief Executive Guoshen Tu said the deal would be a combination of equity and debt, and that he had conducted "preliminary discussions with potential sources of debt financings."

Still, Tu hadn't yet struck an agreement with any of those sources, he admitted in his letter. Nor did he name the entities he said he had spoken with, noting only that he was "confident the debt financing necessary for the acquisition can be arranged on a timely basis."

China Security, based in Shenzhen, which sits just across the harbor from Hong Kong, is a complex roll-up of Chinese security-equipment manufacturers, especially of surveillance cameras and related gear. It was among the first Chinese issuers to sell stock in the U.S. after coming public on this side of the Pacific, in 2006, through a reverse merger.

The letter issued on March 8 was similar to one sent by Tu to the company's board in late January, when the CEO first made public his intentions to take China Security private. Among the only differences: in January, Tu said the purchase price "will not exceed $6.50 per share." On March 8 he said the price would be $6.50 a share. Not long after the January move by Tu, China Security's board said it had hired the Japanese investment bank Nomura International as its adviser.

Also in the Marcy 8 letter, Tu said he would "provide all the necessary equity financing out of my own holdings of common stock and related sources."

Much of Tu's stock, however, was at the time encumbered. Several years ago, Tu pledged 13.9 million of his China Security shares as collateral to a Hong Kong hedge fund called Abax Global in order to obtain a $50 million personal loan. Tu said he wanted to use that money to buy more CSR stock or lend the proceeds back to his company for corporate purposes. Tu's personal loan was since recapitalized and taken over by the state-owned China Development Bank.

(According to China Security, Tu beneficially owns 20.9% of its common stock. China Security has about 89.5 million shares outstanding, according to its 2010 annual report.)

China Security joined a growing trend among Chinese reverse-merger companies. The founders of Harbin Electric ( HRBN) and Fushi Copperweld ( FSIN) also previously announced that they intended to remove their companies from U.S. capital markets through leveraged buyouts.

Then, on March 7, China Fire and Security's ( CFSG)CEO said he wanted to take his company private. Its stock shot higher as well.

China caught the attention of investors once again after new data showed that exports out of China fell in August 2019, particularly exports to the United States. Jim Cramer explains what the data is telling investors about the trade war.